China-based private equity managers with assets of RMB500 million (€55.5 million; $76 million) or more will need to register with China’s regulatory body, the National Development and Reform Commission (NDRC), and submit to regular reviews, according to a measure announced this week.
It’s clear what this will mean for China: The measure will expand the investable universe of China’s $120 billion Social Security Fund, which can only commit to NDRC-approved firms. It will also entitle the NDRC to conduct annual reviews of the private equity firms contained within its records, to examine business practices.
But, what about foreign GPs with China-focused funds? Turns out they, too, will be impacted.
The NDRC measure has implications for GPs' marketing of private equity funds – specifically, the language GPs use when approaching investors.
The government body said GPs would no longer be able “promise” returns to potential investors; and they would only be able to raise money from LPs who “recognise and have the ability to shoulder the risk”.
“The ‘promises’ part is very similar to the [US Securities and Exchange Commission’s new rules governing] language on marketing materials,” said a US-based fund formation lawyer. “There will be a lot of things China GPs will no longer be able to say, just like US managers that register with the SEC.”
Indeed, registering with the SEC will mean there are going to be a number of phrases GPs will not be able to use when fundraising. The language used in marketing materials and presentations must be scrutinised to assure that the firm is complying with SEC guidelines.
Managers will have to examine every pitchbook to be disseminated to prospective clients to make sure there are no qualitative comments or contain language such as “we’re a top firm”.
However, the more surprising part of China’s recent measure is the requirement to be able to fundraise with LPs who have the “ability to shoulder the risk” involved with a commitment. “It will be very interesting to see how that is qualified,” said the lawyer. “How will that risk be measured? I’m not sure they know the answer yet.”
The NDRC expressed concern over which investors should be approached.
“Currently, some of the private equity firms in our nation hold seminars and forums to advertise their funds, and therefore let in public investors who don’t have the basic ability to recognise the risk they’re taking,” the NDRC said in a statement.
One thing is for sure, additional scrutiny on language used in marketing materials is a global reality that fund managers have to face.